A Baby Boomer looks at health, finance, retirement, grown-up children and ... how time flies.

Wednesday, October 19, 2011

The Facts, Just the Facts

I read and hear way too much rhetoric coming from politicos on both the left and the right. "Tax the rich," say the liberals. "They need to pay their fair share!"

"The rich already pay most of the taxes," counter the conservatives. "Stop penalizing successful people who generate the jobs we so desperately need."

I don't know who is right. What I do know is that whenever you read these rants and opinions, they are seldom accompanied by actual facts. A lot of people seem to choose up sides, focus on the numbers that support their point of view and ignore the other numbers And if there are no numbers, they just assert their position in stronger, more inflammatory language -- as if those who shout the loudest must be right.

The point is, opinions are cheap. But facts are dear. Let's look at just a few facts.

Fact: The top 1 percent of wage earners (people now making over, roughly, $400,000 per year) take in some 20 percent of the total income in this country. They pay almost 40 percent of all federal income taxes. However, that's just federal income tax. When you include payroll (Social Security) tax and state tax, the top 1 percent contribute only 21 percent of taxes. -- Source: New York Magazine; also, see Tax Data chart below.

Fact: The top 10 percent (those who make over $115,000 a year) earn close to 50 percent of total income. They pay nearly 70 percent of all federal income taxes. But again, that figure does not count payroll or state taxes. -- Source: The Week Magazine and Tax Data chart

FEDERAL INDIVIDUAL INCOME TAX DATA, 2010

Fact: Some 75 million households, or 46 percent of Americans, do not pay any federal income tax. Approximately 2/3 of the no-income-tax households make less than $50,000 a year. About 1/3 make over $50,000 a year, and those people are mostly the elderly. -- Source: The non-partisan Tax Policy Center

The federal income tax is somewhat progressive. Higher income people do pay a higher percentage of their income in taxes. But the figures in the table above are based on Adjusted Gross Income. And people with more income have more opportunities to adjust their income down by claiming education, business or health expenses. Therefore, the table overstates the portion of income that high income individuals actually pay. Or, as Warren Buffett has admitted, rich people know how to work the system.

Fact: The above table counts only federal income tax. It does not include Social Security tax, which costs people in the bottom 90 percent a higher portion of their income than it does the top 10 percent. According to several studies, more than half of all wage earners pay more in Social Security and Medicare taxes than they do income tax. -- Source: New York Times and elsewhere.

In addition, state income taxes tend to be less progressive than federal taxes. Local property taxes are only indirectly progressive -- typically, the more expensive house, the higher the local tax. But a rich person who lives in a modest house (again, think Warren Buffett) pays no more than the middle-class person living in a similar abode. And of course, property taxes vary widely by state and locality. Wealthy Texans pay less in property tax than middle-class people in New York or New Jersey.

Finally, states and local municipalities rely to a large extent on sales taxes, which again, hit poor people with the same tax rate as the high earners. Some people argue that the poor spend a higher portion of their income on taxable consumer items, and thus pay more sales tax than high income people. That's a guess, though, not a fact. Low income people spend money on food and rent, which typically are exempt from sales tax. Rich people buy expensive cars and take luxurious vacations, which are often subject to extra sales tax.

Fact: In the two years since the so-called end of the Great Recession, in June 2009, the inflation-adjusted median income of American families has fallen 6.7 percent, to just under $50,000. Source: Kiplinger's Magazine

And that, to me, is the most relevant fact. People's incomes are falling. Which is why I believe -- and this is opinion now, not fact -- that while raising taxes on the top 1 percent of earners, or the top 10 percent of earners, may be the "fair" thing to do, it is beside the point. Raising taxes on top earners will not increase employment; it will not raise middle-income wages.

8 comments:

According to Friedman's premise: America can get it's groove back if it's people start thinking and acting like immigrants. Are you kidding me?

That would mean people would have to work hard, accept lower pay, like that $7 an hour those OWS kids reject, live in studio apartments or have 5 kids share a bedroom, eat beans and crap in a bucket they keep under their bed.

That's what my immigrant father did. For decades I might add before he became a multi-millionaire.

With all the handouts our govt is giving to people right now, no one is going to do what Friedman suggests. Another pipe dream.

BTW, the Great Recession never ended. It's still going full steam ahead.

"And people with more income have more opportunities to adjust their income down by claiming education, business or health expenses. Therefore, the table overstates the portion of income that high income individuals actually pay."

Your statement above is incorrect. Education credits are eliminated as income rises and health expense deductions of the wealthy are limited twofold - once by a deductible of 7.5% of AGI and, as part of total itemized deductions, which are limited again by income.

Business expenses (the cost of doing business) must be deductible.Otherwise any business (small or large) would be paying taxes on gross income and would not be able to survive because it would be possible that their taxes could exceed net income.

Also, although there is a cap on the total amount of earnings subject to social security taxes, the wealthy ARE taxed on social security payments received. So they pay a tax into SS system and are taxed again when they receive it.

Tom, I appreciate your presenting a calmer, more balanced perspective and also the book recommendations. In this overheated political environment, it's hard to discern facts from the screaming on both sides. I agree that stagnant and falling wages and loss of jobs are the real problems.

Thanks for the info but I'm afraid if you asked a hundred experts the same question, you'd get a hundred different answers and a hundred politicians trying to spin it all in their favor. The only thing I know for sure is that I'd be willing to pay a little more to help get the country back on track... as long as Washington promises to stop building bridges to nowhere.

Great post. Won't change anyone's mind, I don't think, but still a great post. Politics is not about rational, logical, thinking. It's about emotion and "rousing the base (mob)".

The Federal government (all governments everywhere also, I think) use taxes to influence society; to encourage some activities and discourage others.

Personally, I believe only the consumer pays taxes. They pay them directly and they pay them indirectly (if you rent, you pay your landlord's taxes on that property as a part of the rent). So, raising taxes on the rich will likely end up costing the middle class on down more.

The answer is for government to reduce spending. And it won't fix things immediately, nothing will.

Tom, great post. We can all use more information to help with our "informed" decisions. I like the Friedman book, as you know, also the Morgensen (?) book you recommended some weeks ago concerning greed, averice and all those characteristics that get us into trouble.

Interesting comments from your readers. Don't agree with Morgan that people won't do what Friedman suggests, many people already do many of the things he recommends. Dianne

About Me

I’m a Baby Boomer, part of the pig-in-a-python demographic group that has brought so many changes to America – and will continue to do so until we cash our last Social Security check. I had a typical baby boomer career. I attended college, went to business school, worked for several companies, then in my mid-50s was laid off. Meanwhile, I got divorced, and my two kids left for college. Now I live with my significant other, B, who has two children of her own. We live in the New York area, a convenient stopover for our four peripatetic 20-somethings. And I produce this blog Sightings Over Sixty which covers health, finance, retirement – concerns of people who realize that somehow they have grown up.